11:51 ET Optical Pessimism : Morgan Stanley's downgrades of four stocks in the optical networking sector this morning suggest that even the conflicted brokerage firm community is coming around to the grim reality facing this sector. Up until now, the not-so conflicted research house Bernstein has been one of the only realistic voices on the optical sector. That a brokerage firm of Morgan Stanley's stature is now saying that the bottom for the sector is over a year off highlights just how bad the fundamentals are. Briefing.com has been writing about the problems facing the sector for months now, and unfortunately, everything we have seen lately continues to support our pessimistic view. Success for the optical sector depends on rising capital expenditures by carriers. In recent weeks, however, we have seen a steady stream of downward revisions to carrier capex plans, which will only further intensify the pricing pressure that is just beginning to hit this sector. You could still justify buying these stocks if there were at least some leading indicators that carrier capex might pick up in the months and quarters ahead. But here again, there is no good news. On the emerging provider front, we are continuing to see cost-cutting and even Chapter 11 filings as these firms struggle to stay in business. Capex within this group is likely to be in freefall for many quarters to come. The news is better for the incumbent carriers as they will benefit from the demise of many emerging carrier competitors, but the market in total is shrinking, as a modest increase in overall carrier revenues will not be enough to offset the rising debt service burden. The only realistic path to increasing capex through next year is if emerging carriers can once again gain access to new financing. Nothing can be ruled out in the financial markets, but renewed capital availability for emerging carriers is a long shot at best. The turn in the sector will come into better focus when enough emerging carriers have failed or been acquired to reduce the overall sector's debt burden and also reduce the supply of bandwidth. When this happens, rising capex at the incumbents will begin to dominate the telecom picture and the optical sector can look forward to renewed growth. Unfortunately, that turning point is not yet visible. - Greg Jones, Briefing.com
10:44 ET ******
PLDs : After driving chip stocks off early-April lows, investors are starting to question the logic behind the May rally in chip makers specializing in Programmable Logic Devices (PLDs). There is good reason to question that rally. The stocks in the group outperformed the Nasdaq by an average of 20% during May, despite no real change in the underlying fundamentals. Two of the leaders in the PLD sector, Altera (ALTR) and Xilinx (XLNX) will be offering up mid-quarter updates soon, Altera tomorrow, and Xilinx on Monday (other PLD makers include LSCC and CY). Bear Stearns analyst, Charles Boucher isn't expecting much cheery news. In fact, he expects to hear that business conditions have remained terrible throughout the first two months of the June quarter. The PLD market is largely dependent on the communications market, both data communications and telecommunications. Demand remains weak in both end markets as OEMs work off excess inventory and not only trim back purchases, but cancel previously ordered chips. The answer to the question of whether or not European softness will contribute to further orders weakness across the tech sector, seems to be a resounding yes. Weak overseas orders is surfacing more frequently as justification for earnings and revenue warnings, and there is no reason to believe the weakness will not persist throughout the next two quarters. As a result, June quarter estimates are likely to come down from already reduced levels. The estimate revisions will likely cause selling in the shares considering the rally they've had. If you believe that the stock market is always forward-looking by 2-3 quarters, there will be some buy-and-hold bargains out there in the next two weeks, if you keep a 12-18 month perspective. However, if you'd rather wait until industry fundamentals show signs of improvement, we suspect you'll be sitting on your hands for at least a couple quarters. -- Matt Gould, Briefing.com
10:31 ET ******
RadioShack (RSH) 27.25 -5.60: The walls have come tumbling down on RadioShack this morning in the wake of an earnings warning for the company's fiscal second quarter. The aforementioned warning was announced after yesterday's close and it was attributed to two factors: slower than expected sales and lower than expected gross margins due to lower realized gross margins in the wireless communications category. Because of those two factors, RSH expects Q2 earnings to be between $0.25 and $0.27 per share, which is well shy of the First Call consensus estimate of $0.34 and a yr-ago profit of $0.38 per share. In addition, RSH also stated that FY01 earnings could fall approximately 10% from the prior year when it earned $1.84 per share. The latter warning is disconcerting in and of itself, yet it becomes even more bothersome when you recognize that it is the second time since February that RSH has altered its full-year outlook. The company's original expectation was for earnings growth of 15-20% in FY01. On the heels of a Q1 earnings warning in April, though, that target was lowered to 7-10%. The fact that negative EPS growth is now being projected raises concerns not only about the level of consumer demand, but also about the company's forecasting ability. Consequently, there is little comfort in RSH's contention that it expects improvement in 2H01. Following the company's Q1 warning, RSH dropped nearly 30%. Regular readers of Briefing.com will recall that we felt the market overreacted that day, arguing that the risk-reward proposition was a favorable one for investors given RSH's proximity to its lowest P/E multiple in the last five years. We believe that is still the case, and thus, we would continue to hold the stock; however, RSH's struggle to predict its earnings in accurate fashion leaves us reluctant to commit new money at this time.-- Patrick J. O'Hare, Briefing.com
09:26 ET ******
Chip Stocks: Everybody's got an opinion. A number of analysts are out with notes this morning on the semiconductor group. The tone is decidedly negative. Too many details to list here -- visit Briefing.com's InPlay page for more detail....Today provides a good opportunity to explain Briefing.com's view of the group. Even with a 12% sell-off in the Semi Index (SOX 623.25) over the past week, the Index is still up 37% since early April. We would avoid the group until the stocks reflect a more realistic view of the semiconductor market. Joe Osha at Merrill Lynch says we could easily see the SOX moving to the 550 level if evidence of a recovery does not materialize soon....Much has been said of the build-up in inventories resulting in severe pricing pressure. That side of the equation (supply side) has been working itself out over the past few months. The problem is that demand is not picking up. While the former is great news, the latter argues strongly against a 37% run in the Index as it's obviously the more important side of the equation....The strength in the group was more due to momentum as traders speculated the bottom in demand picture had occurred. Aside from a few companies feeling confident of a bottom, we do not see the evidence. Momentum lasts only so long while fundamental valuations will inevitably rule the day. Many chip stocks are trading at forward p/e's over 30x, which is expensive given the current conditions. There will certainly be opportunities in the space, but this is more of a broad theme comment. Long term holders of Intel (INTC 27.85) should not worry, for example. Would we be aggressively buying here? No, we expect many of these names can be picked up more cheaply. -- Robert J. Reid, Briefing.com
09:21 ET ******
Morning Movers : The market ended the first session of the week on the defensive and the after hours warning from Sun Microsystems (SUNW 18.67) and the pre-market downgrade from Morgan Stanley of four optical systems companies has added considerably to the negative bias. We highlighted SUNW yesterday in the wake of estimate cuts and while it held above an important floor, it is indicated to open 1.3 points lower this morning. This puts the stock below its 50 day simple ma (17.8) and the support near 17 (mid-month low/62% retracement of April/May rally) in danger of a quick test. A bounce from this area is possible but SUNW will have to work out of a considerable hole just to neutralize the recent negative bias. The key will be to see a sustained move back through the moving average and a breach of the 18.40 barrier. Failure would leave the door open thereafter to the 15.50 area. As for the optical downgrades, the most interesting aspect and by far the most concerning was that the firm suggested that the recovery in demand may not be seen until Q3 2002. Two of the firms cut were JDS Uniphase (19.17) and Tellabs (TLAB 37.38) (NT and SCMR also cut). JDSU is presently indicated to open 1.1 points lower implying a test of a decent chart congestion area near 18. A secondary floor comes into play between 16.85 and 16.50. A move back within its recent trading range near 19 would be the first step to improving the very short term tone. TLAB is currently trading 2.6 points below the previous close putting the congestion in the 34/33 under immediate pressure. A failure to mount a turnaround near this support leaves little of interest in front of the multi-year low at 31.23 established last month. As for the Nasdaq Composite, initial support is in the 2135/2125 area. A recovery back through at least 2170 is needed to argue that a period of stabilization is under way. Failure exposes a secondary floor near 2105/2100. -- Jim Schroeder, Briefing.com
17:58 ET ****** 29-May-01
Sun Microsystems (SUNW) 18.67 -1.80: The market just got its first taste of what a major June quarter earnings warning can look like. In its mid-quarter conference call, technology bellwether Sun Microsystems announced it now expects fourth quarter revenue to come in between $3.8 billion and $4.0 billion. Relative to current consensus estimates of $4.36 billion, the revised guidance constitutes a topline shortfall of between 8.3% and 12.8%. Not surprisingly, the bottom line doesn't look any better. SUNW now expects pro forma fourth quarter earnings between $0.02 EPS and $0.04 EPS. On a GAAP basis, these results should be just slightly better than break even for the quarter. Earlier today, Goldman Sachs analyst Laura Conigliaro cut her full year 2002 estimates for SUNW citing three primary factors: 1) weak demand in the U.S. that's beginning to spread abroad, 2) a transition in the company's product cycle, and 3) a tougher pricing environment. Admittedly, the cut to estimates was very well timed, but according to SUNW only one of the former factors is responsible for its Q4 warning. "The news is Europe" stated SUNW management on the conference call. "Demand in Europe tailed off more than we thought it would." On the issue of product cycle, management repeatedly dismissed the notion its transition to UltraSparc-3 was contributing to weaker than anticipated performance. Instead, SUNW placed the blame on a broadly weak macroeconomic environment that was "stabilizing in the U.S." but again weaker than expected in Europe. SUNW also declined to identify pricing pressures as a problem. Fourth quarter gross margins are expected to be roughly in line with margins for Q2 and Q3. In the regular session, SUNW traded off 8.8% on higher than average daily volume. Since the conference call, SUNW has dropped another 6% in late trading. |
